Builders: We can't give it away

Nichola Saminather

The sluggish outlook for residential construction has builders competing hard for a dwindling number of buyers. Photo: Glenn Hunt

Australian housing developers are resorting to discounts, gift cards and help with mortgage payments to compete for dwindling buyers as home sales slow.

Stockland, Australia's biggest listed home builder, is giving rebates and gift cards of as much as $30,000 at projects in Victoria, Queensland and New South Wales states. Devine is matching deposits in South Australia and taking over mortgage payments for as long as a year in Melbourne. Peet has been offering discounts of as much as $50,000 in Western Australia, Queensland and Victoria.

Central bank interest rate cuts of 1.75 percentage points since November 2011 have failed to spur housing demand amid slowing job growth. New home sales in December were 6.6 per cent below the level of a year earlier, and loan approvals to build or buy new homes the same month were 31 per cent below an October 2009 peak.

“The discounts this time 'round are bigger than we've seen before because the response we've seen to rate cuts has been far more muted,” said Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, part-owned by Cromwell Property Group. “Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn't there.”

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Falling Prices

Developers, including Stockland and Peet, have said they're facing the worst housing market conditions in 20 years and expect little change in 2013. Stockland, Mirvac Group and Australand Property Group may report “negative earnings surprises” in the fiscal year ending in June, John Kim, Sydney-based head of Australian property research at CLSA Asia-Pacific Markets, said in a report Jan. 29. Kim expects Stockland's shares to underperform peers, while he gives an outperform rating to Australand and Mirvac. Both benefit from non- residential revenue sources.

Australian home-building approvals unexpectedly declined for the second time in three months in December. The number of permits granted to build or renovate houses and apartments fell 4.4 per cent from November, the Bureau of Statistics said in Sydney yesterday.

Building approvals in December advanced 9.3 per cent from a year earlier, yesterday's report showed. That compares with economists' forecast for a 14.9 per cent rise year-over-year.

Housing companies' shares are likely to have the worst performance of all property groups, Tony Sherlock, Sydney-based head of property research at Morningstar Australasia, said in a telephone interview. “Pure play” residential groups such as Peet, Devine and Sunland Group will struggle, he said.

Home prices fell 0.4 per cent across Australia's eight major cities in 2012, to an average of $483,000, after dropping 3.8 per cent the previous year, according to the RP Data-Rismark home value index. The biggest decline in 2012 was in Melbourne, where prices fell 2.9 per cent. Prices in Sydney in New South Wales state and Perth in Western Australia, both of which are seeing growing populations amid a shortage of homes, rose 1.5 per cent and 0.8 per cent respectively.

Sales of new homes fell to 5,875 in December, compared with 6,287 a year earlier, figures from the Housing Industry Association show. The number of loans to build or buy new homes fell to a seasonally adjusted 7,189 in November, from the previous high of 10,457 in October 2009, according to the Australian Bureau of Statistics.

Two Speed

Australia's two-speed economy -- where mining regions like Western Australia thrive while manufacturers, retailers and builders in the south and east struggle -- has created disparities in the housing market. Prices may jump as much as 7 per cent in Perth, remain unchanged in Adelaide, in South Australia, and rise a maximum 3 per cent in Melbourne this year, Sydney-based researcher Australian Property Monitors said.

Melbourne, Victoria's state capital, is facing a “looming oversupply” of new apartments, APM said. The city has the nation's most over-supplied housing market after a building boom driven by forecasts for higher demand that didn't materialize as population growth slowed.

“We're still getting new supply coming through in Melbourne and we have a flat market in terms of buyer demand,” Andrew Wilson, senior economist at APM, said in a telephone interview. “This means developers are competing amongst each other for a smaller pool of buyers.”

Value Adding

Stockland reported a 35 per cent drop in profit in the year ended June 30. It said in December that earnings for this fiscal year will be at the lower end of its previous guidance of 10 per cent to 15 per cent below fiscal year 2012 because of challenging conditions in Victoria. The shares rose 11 per cent last year, trailing the 15 per cent gain in the benchmark S&P/ASX 200 Index.

“Rather than reduce the price, developers offer incentives as a value add,” said David Milton, Sydney-based managing director for residential projects at broker CBRE Group Inc. “Where the incentives make good financial sense, they have a very positive effect.”

Stockland is offering $10,000 cash rebates on house-and-land packages at suburban Melbourne projects, as much as $30,000 in New South Wales, and gift cards worth as much as $15,000.

The company offers incentives throughout the year and special marketing campaigns during the spring and summer peak selling seasons, Mark Hunter, chief executive officer for residential at Stockland, said in an e-mailed response to questions.

Landscaping Offers

Perth-based Peet has landscaping offers as well as discounts starting at $10,000. Peet reported a 76 per cent slump in net income in the year ended June 30, citing deteriorating market conditions and said it didn't expect much improvement in the following year.

The incentives “are designed to boost affordability and encourage homebuyers to explore property ownership at a time when lower interest rates alone have not been enough to raise consumer confidence,” Brendan Gore, chief executive officer of Peet, said in an e-mailed response to questions.

The offers add to efforts by state governments and the Reserve Bank of Australia to stimulate demand. Queensland, New South Wales and South Australia are paying $15,000 to buyers of lower-end new homes, according to state announcements made in 2012. New South Wales and South Australia are also offering additional refunds on newly built homes and land.